UK business confidence in Q3 2026 stayed in negative territory for seven consecutive quarters, which ties with the 2008 global financial crisis as the longest period of low confidence.

During Q3, confidence fell sharply, from +7.3 in August to -0.5 by the end of the survey period in September, in response to renewed hostilities between Iran and the US. Despite UK business confidence staying in negative territory, the -0.5 score is still a marked improvement on the -14.6 rating in Q2 2026.

Better than expected economic conditions prior to the conflict’s resurgence saw domestic sales rise and profit growth hit a two-year high. But further increases in oil and gas prices as a result of the conflict caused confidence to waiver.

Geopolitical risks are still the biggest challenge to business performance, as a result, affecting three in five (58%) firms. Labour costs (53%) were the second biggest challenge, followed by regulation (47%), energy costs (45%) and the tax burden (41%). Expectations for domestic sales growth, profits and turnover slowed in Q3, the report found.

Alan Vallance, ICAEW Chief Executive, said that the Prime Minister and Chancellor need to consider business sentiment and resilience ahead of the budget. “While there is much the government can’t control, the budget presents an important opportunity to turn ambition into action. Businesses have been burdened by rising costs, higher taxes, regulatory change and persistent uncertainty for far too long.”

R&D is the main response to rising costs

R&D activity grew at its fastest rate since Q3. Alongside this, separate ICAEW research found that firms are seeking productivity and efficiency improvements (63%) ahead of price increases (54%) or mothballing expansion plans (25%).

R&D growth was particularly strong in the IT and communications and financial services sectors (4% and 3.5% respectively). 

“Though stronger R&D spending could boost productivity, it is as much about survival as success, with firms investing in innovation to strengthen resilience amid growing headwinds, while recruitment takes a back seat,” said Suren Thiru, ICAEW’s Chief Economist.

Inflation pressures remain in check

Selling price inflation fell from 2.5% to 2.2% in Q3. Energy, water and mining prices are expected to rise the most over the next 12 months. Input prices rose faster (3.9%) than selling prices (2.2%), which indicates that businesses are struggling to pass on higher costs to customers.

“Cooling price and pay indicators point to inflationary pressures remaining under control, with firms still struggling to pass higher costs onto customers, making a case for a November rate rise more difficult to justify.”

Average total salaries increased by 2.8%, the lowest level since Q1 2022 and down from 3.1% in Q2. Salary growth expectations also appear softer than earlier in the year, the survey found. 

Employment growth fell from 1.4% in Q2 to 0.7% in Q3, most likely in response to higher labour costs and increased automation. It’s expected to be strongest in energy, water and mining and weakest in retail and wholesale.

The budget needs business rates reform

As part of its submissions to government, ICAEW is advocating for changes to business rates as a solution to the UK’s low growth problem. "Business rates reform is key to unlocking growth,” said Alan Vallance. “A one-year freeze in the multiplier would provide immediate relief, while a commitment to longer-term reform would boost confidence and investment.”